Market Drops & Historical Perspectives
It was September of 1939 and Germany invaded Poland. This was an incursion that would subsequently entangle virtually all of Europe, but would eventually involve Japan, Russia, the United States, and others all over the world. A 26-year-old man in Tennessee observed the terrible negativity of people around him and considered his own dreadful fear. Then this young man, John Templeton, contacted his broker and instructed him to buy $100 worth of every stock that was less than $1.00 per share. He told his broker to buy them all, even the ones that were trading in bankruptcy. He wound up with 104 companies. John borrowed ten thousand dollars (a lot of money in those days) to make this purchase. As you know the war raged on with its many fearful battles, bombings, and terrible human loss. Five years later, in 1944, he sold. 100 of his 104 stocks were profitable, and John reaped a profit of over four times his original investment. In his life, John Templeton started Templeton Funds and was hugely successful, giving much of his wealth to charity. He died in 2008.
Perennially successful investors are those who recognize that opportunity does not always present itself when people are feeling confident, and things look rosy. One of the most difficult tasks in investing is to have the confidence to step in and buy or to hold an existing position when things look the darkest, but invariably history proves that negativity does not last forever. 1
Over the last six months or so, falling prices have certainly been the norm, especially with respect to technology stocks. These companies had a great two-to-three-year upside run, and now they have been dropping in price, almost collectively. As unpopular as they now appear to be, we believe that the majority of the stocks we hold in our portfolios will continue to earn, to grow, and to prosper.
Some of you have heard of Charlie Munger, and many may not be familiar with his name. Charlie Munger is Warren Buffett’s partner. They have been friends for over 60 years and business partners for the last 41. As you know, Mr. Buffett has always been the more vocal of the two, and therefore is far more well known. After the 2008-2009 precipitous market drop, Charlie Munger made a statement.2 He said there were three times in the last 41 years when, from the top tick to the bottom tick, their holdings lost 50%. Keep in mind that their company, Berkshire Hathaway, did not invest in what Warren or Charlie believed to be high risk, but solid growing companies with strong balance sheets and increasing earnings.
We could attempt to list reasons for this recent decline, higher interest rates, inflation, sharply increasing housing prices and the terrible war in Ukraine. However, you already know that. We typically get a significant drop in the market every few years. Sometimes the drops are steeper and last a little longer. Market declines rarely end with a big splash of positive news. Prices may simply start to move higher, often with an imperceptible change in current conditions.
These Market declines reset stock valuations and position the market for a longer-term advance. Prices can recover quickly. According to the Schwab Center for Financial Research, since 1974 the S&P 500 has risen an average of more than 8% following a bottom and more than 24% after one year. Keeping a long-term perspective is central to investment success. As with all precipitous drops in the market, this too shall pass.